Credit and Those Who Use It.

Photo by Jp Valery on Unsplash

Credit, an often-misconstrued facility, is seen as a tool that benefits only the creditor. It can be seen as a means of locking people into the ‘Rat race’ or as the method in which young adults finance their lives. However, its true definition is more sobering:

“Bank credit is the total amount of funds a person or business can borrow from a financial institution.” — Investopedia

In general, the sentiment on credit is heads or tails — “Never use credit” or “If you can pay it back why not?”, with the truth likely to be somewhere in-between depending, of course, on the individual. And this is precisely what I wanted to know. Who can afford to use credit — in a literal and financial sense? Who is most likely to fall under the pressure of interest? How much credit can they handle? To do this I ventured into the UCI data repository and found a dataset which tracked 30,000 Taiwanese individuals with different ages, sexes, educational background, bill statements and repayment information.

Age isn’t everything…

When checking the age by age I wanted to know 2 things:

1. Are young people borrowing indiscriminately?
2. Is the proportion of defaulted payments higher with younger people?

What I found was that the first point was true, given this data, the second, however, was not. What the data showed instead was that the proportion of people who defaulted payments by age group was largely the same, with people 30–39 having the lowest ratio of no defaulted payments to defaulted payments.

Bar chart showing number of individuals in each age group with red indicating those who defaulted on interest payments and green those who did not.

As for the first point: it seems as though young adults in their 20s to early 30s are much more likely to use credit. So, all-in-all, we young adults do in-fact borrow more, but it doesn’t necessarily make us more likely to default or be trapped in a cycle of interest payments; to see who is, we need to look further.

I have a degree, so I won’t default on payments…. right?

Formal education is often linked to financial education however, here we find that it isn’t always quite that simple. It may be because this dataset had only 30,000 individuals, but when we plot out the ratio of no defaults to defaults, and split it by education we get the following:

Chart showing the ratio of those who defaulted on payments to those who did not by educational background.

Now this may be hard to take in; it certainly was for me. The groups with the smallest proportion of defaults were illiterate. The next smallest was those who did a professional course. But doing a degree would not make you less likely to default than if you were to just skip higher education entirely. You might very well ask: “How much is each group borrowing?”. Because if those who pay back borrow much less than those who don’t, then it may invalidate any conclusions, but in this case, you can rest assured these conclusions arevalid. To check them, we visualise the ratios as bubbles and label the average credit given.

A bubble chart where size is determined by (No. of people who did not default)/(No. of people who defaulted). With average credit and educational background labeled on each bubble.

Looking at the graph above we can see that the illiterate group borrowed the most on average and still managed to keep on top of interest payments! Whereas those who stopped, at high school borrowed the least, but struggled to pay the interest. In this case, we can even consider those who did basic 4-year study only. They borrowed NT$ 217k on average, and all those who took part did not default.

The wrap up.

We now know the performance of different age groups, and educational backgrounds. And we took note that the people who took part in the study and who didn’t take their education far, borrowed more, but also defaulted less. More importantly, there weren’t any groups that were more likely to default than to keep paying the interest.

As the data used only contained 30,000 people, it might appear that a formal education is bad for your financial literacy. Many things can happen that impede people’s ability to pay interest. The Taiwanese people who were tracked during this study are not representative of everyone on earth!

I would have liked to have known what everyone spent the credit on as this would have given us a clearer picture of why people defaulted. Regardless: I hope you have enjoyed reading!

References:

Investopedia — https://www.investopedia.com/terms/b/bank-credit.asp

The dataset — https://archive.ics.uci.edu/ml/datasets/default+of+credit+card+clients